When I was a young adult, like many others, I enjoyed the excitement of tax time and the amount of money I would get back. I would dream of what fun and exciting things I might do with this “extra money.” Then, when starting my career in financial services, I learned the real truth behind tax refunds and one of the greatest money scams the federal and state governments (those that have a state income tax anyway) are running.
If you are like I was, I am here to give you the stark reality of tax refunds. While receiving that lump sum may feel like a bonus from all of your hard work of the year prior and diligently paying your taxes, it is really nothing more than the taxing authority saying “thank you for the interest free loan, we didn’t need all of this.”
That’s right! Interest free loan. How many of those have you received in your life? Is the federal government handing those out to you? NOPE! So why should you give that to them?
I remember when I was finally enlightened by a mentor that the best tax situation to be in is to owe the government as much as possible with your tax return, without paying a penalty. I eagerly changed my wife’s and my withholdings and dropped them to what I estimated to be the lowest we could get away with and then diligently stashed the money in a savings account every month. The following year after completing our taxes, I proudly exclaimed to my wife, “we did it!” “We finally put one over on them!”
We owed thousands of dollars, but benefited by collecting hundreds of dollars of interest with the net result in our favor. I made one near fatal mistake, I didn’t explain all this to my wife in advance. So when I shared my excitement of us having to write a big check, she nearly…well, I will let you the readers use your imagination.
You see, outside of some refundable credits that are allowed to certain taxpayers, a tax refund is simply the taxing authority giving us our money back because we proved to them through our tax return that we overpaid them. To compound the fact that they have had use of our money all year, they are not paying us interest on those funds. However, as unfair as it may sound, if you owe them too much at the end of the year, they will charge you extra. The balance of power in this scenario is still in their favor.
So, since we are in the tax filing season, there is no better time to review your 2023 return and start making appropriate changes now early in 2024 to affect the outcome of filing season next year. This is not to say that you need to take this to the extreme and write a big check, but maybe just try to get closer to break even. Keep your money to yourself. Spend it or save it, it’s yours and they are not going to pay you for loaning it to them all year.
And in case you are curious, my wife allowed me to “see the errors of my ways” and now we manage closer to break even (not a big check written or a big refund coming back), but that is still a story in development.
